RE: VOTING TRUST AGREEMENT

- Effect of directors execute a VTA over all their shares and no

qualifying shares left for them
G.R. No. 93695 February 4, 1992
RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,
vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING
CORP., PABLO GONZALES, JR. and THOMAS GONZALES,
respondents.
Cayanga, Zuniga & Angel Law Offices for petitioners.
Timbol & Associates for private respondents.
GUTIERREZ, JR., J.:
What is the nature of the voting trust agreement executed between
two parties in this case? Who owns the stocks of the corporation
under the terms of the voting trust agreement? How long can a voting
trust agreement remain valid and effective? Did a director of the
corporation cease to be such upon the creation of the voting trust
agreement? These are the questions the answers to which are
necessary in resolving the principal issue in this petition for certiorari
whether or not there was proper service of summons on Alfa
Integrated Textile Mills (ALFA, for short) through the petitioners as
president and vice-president, allegedly, of the subject corporation
after the execution of a voting trust agreement between ALFA and the
Development Bank of the Philippines (DBP, for short).
From the records of the instant case, the following antecedent facts
appear:
On November 15, 1985, a complaint for a sum of money was filed by
the International Corporate Bank, Inc. against the private respondents
who, in turn, filed a third party complaint against ALFA and the
petitioners on March 17, 1986.
On September 17, 1987, the petitioners filed a motion to dismiss the
third party complaint which the Regional Trial Court of Makati, Branch
58 denied in an Order dated June 27, 1988.
On July 18, 1988, the petitioners filed their answer to the third party
complaint.
Meanwhile, on July 12, 1988, the trial court issued an order requiring
the issuance of an alias summons upon ALFA through the DBP as a

consequence of the petitioner's letter informing the court that the

summons for ALFA was erroneously served upon them considering
that the management of ALFA had been transferred to the DBP.
In a manifestation dated July 22, 1988, the DBP claimed that it was
not authorized to receive summons on behalf of ALFA since the DBP
had not taken over the company which has a separate and distinct
corporate personality and existence.
On August 4, 1988, the trial court issued an order advising the private
respondents to take the appropriate steps to serve the summons to
ALFA.
On August 16, 1988, the private respondents filed a Manifestation
and Motion for the Declaration of Proper Service of Summons which
the trial court granted on August 17, 1988.
On September 12, 1988, the petitioners filed a motion for
reconsideration submitting that Rule 14, section 13 of the Revised
Rules of Court is not applicable since they were no longer officers of
ALFA and that the private respondents should have availed of
another mode of service under Rule 14, Section 16 of the said Rules,
i.e., through publication to effect proper service upon ALFA.
In their Comment to the Motion for Reconsideration dated September
27, 1988, the private respondents argued that the voting trust
agreement dated March 11, 1981 did not divest the petitioners of their
positions as president and executive vice-president of ALFA so that
service of summons upon ALFA through the petitioners as corporate
officers was proper.
On January 2, 1989, the trial court upheld the validity of the service of
summons on ALFA through the petitioners, thus, denying the latter's
motion for reconsideration and requiring ALFA to filed its answer
through the petitioners as its corporate officers.
On January 19, 1989, a second motion for reconsideration was filed
by the petitioners reiterating their stand that by virtue of the voting
trust agreement they ceased to be officers and directors of ALFA,
hence, they could no longer receive summons or any court processes
for or on behalf of ALFA. In support of their second motion for
reconsideration, the petitioners attached thereto a copy of the voting
trust agreement between all the stockholders of ALFA (the petitioners
included), on the one hand, and the DBP, on the other hand, whereby
the management and control of ALFA became vested upon the DBP.
On April 25, 1989, the trial court reversed itself by setting aside its
previous Order dated January 2, 1989 and declared that service upon

the petitioners who were no longer corporate officers of ALFA cannot

be considered as proper service of summons on ALFA.
On May 15, 1989, the private respondents moved for a
reconsideration of the above Order which was affirmed by the court in
its Order dated August 14, 1989 denying the private respondent's
motion for reconsideration.
On September 18, 1989, a petition for certiorari was belatedly
submitted by the private respondent before the public respondent
which, nonetheless, resolved to give due course thereto on
September 21, 1989.
On October 17, 1989, the trial court, not having been notified of the
pending petition for certiorari with public respondent issued an Order
declaring as final the Order dated April 25, 1989. The private
respondents in the said Order were required to take positive steps in
prosecuting the third party complaint in order that the court would not
be constrained to dismiss the same for failure to prosecute.
Subsequently, on October 25, 1989 the private respondents filed a
motion for reconsideration on which the trial court took no further
action.
On March 19, 1990, after the petitioners filed their answer to the
private respondents' petition for certiorari, the public respondent
rendered its decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, the orders of respondent
judge dated April 25, 1989 and August 14, 1989 are hereby SET
ASIDE and respondent corporation is ordered to file its answer within
the reglementary period. (CA Decision, p. 8; Rollo, p. 24)
On April 11, 1990, the petitioners moved for a reconsideration of the
decision of the public respondent which resolved to deny the same on
May 10, 1990. Hence, the petitioners filed this certiorari petition
imputing grave abuse of discretion amounting to lack of jurisdiction on
the part of the public respondent in reversing the questioned Orders
dated April 25, 1989 and August 14, 1989 of the court a quo, thus,
holding that there was proper service of summons on ALFA through
the petitioners.
In the meantime, the public respondent inadvertently made an entry
of judgment on July 16, 1990 erroneously applying the rule that the
period during which a motion for reconsideration has been pending
must be deducted from the 15-day period to appeal. However, in its
Resolution dated January 3, 1991, the public respondent set aside
the aforestated entry of judgment after further considering that the

rule it relied on applies to appeals from decisions of the Regional Trial

Courts to the Court of Appeals, not to appeals from its decision to us
pursuant to our ruling in the case of Refractories Corporation of the
Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989].
(CA Rollo, pp. 249-250)
In their memorandum, the petitioners present the following
arguments, to wit:
(1) that the execution of the voting trust agreement by a stockholders
whereby all his shares to the corporation have been transferred to the
trustee deprives the stockholders of his position as director of the
corporation; to rule otherwise, as the respondent Court of Appeals
did, would be violative of section 23 of the Corporation Code ( Rollo,
pp. 270-3273); and
(2) that the petitioners were no longer acting or holding any of the
positions provided under Rule 14, Section 13 of the Rules of Court
authorized to receive service of summons for and in behalf of the
private domestic corporation so that the service of summons on ALFA
effected through the petitioners is not valid and ineffective; to
maintain the respondent Court of Appeals' position that ALFA was
properly served its summons through the petitioners would be
contrary to the general principle that a corporation can only be bound
by such acts which are within the scope of its officers' or agents'
authority (Rollo, pp. 273-275)
In resolving the issue of the propriety of the service of summons in
the instant case, we dwell first on the nature of a voting trust
agreement and the consequent effects upon its creation in the light of
the provisions of the Corporation Code.
A voting trust is defined in Ballentine's Law Dictionary as follows:
(a) trust created by an agreement between a group of the
stockholders of a corporation and the trustee or by a group of
identical agreements between individual stockholders and a common
trustee, whereby it is provided that for a term of years, or for a period
contingent upon a certain event, or until the agreement is terminated,
control over the stock owned by such stockholders, either for certain
purposes or for all purposes, is to be lodged in the trustee, either with
or without a reservation to the owners, or persons designated by
them, of the power to direct how such control shall be used. (98 ALR
2d. 379 sec. 1 [d]; 19 Am J 2d Corp. sec. 685).
Under Section 59 of the new Corporation Code which expressly
recognizes voting trust agreements, a more definitive meaning may

be gathered. The said provision partly reads:

Sec. 59. Voting Trusts One or more stockholders of a stock
corporation may create a voting trust for the purpose of conferring
upon a trustee or trustees the right to vote and other rights pertaining
to the share for a period rights pertaining to the shares for a period
not exceeding five (5) years at any one time: Provided, that in the
case of a voting trust specifically required as a condition in a loan
agreement, said voting trust may be for a period exceeding (5) years
but shall automatically expire upon full payment of the loan. A voting
trust agreement must be in writing and notarized, and shall specify
the terms and conditions thereof. A certified copy of such agreement
shall be filed with the corporation and with the Securities and
Exchange Commission; otherwise, said agreement is ineffective and
unenforceable. The certificate or certificates of stock covered by the
voting trust agreement shall be cancelled and new ones shall be
issued in the name of the trustee or trustees stating that they are
issued pursuant to said agreement. In the books of the corporation, it
shall be noted that the transfer in the name of the trustee or trustees
is made pursuant to said voting trust agreement.
By its very nature, a voting trust agreement results in the separation
of the voting rights of a stockholder from his other rights such as the
right to receive dividends, the right to inspect the books of the
corporation, the right to sell certain interests in the assets of the
corporation and other rights to which a stockholder may be entitled
until the liquidation of the corporation. However, in order to distinguish
a voting trust agreement from proxies and other voting pools and
agreements, it must pass three criteria or tests, namely: (1) that the
voting rights of the stock are separated from the other attributes of
ownership; (2) that the voting rights granted are intended to be
irrevocable for a definite period of time; and (3) that the principal
purpose of the grant of voting rights is to acquire voting control of the
corporation. (5 Fletcher, Cyclopedia of the Law on Private
Corporations, section 2075 [1976] p. 331 citing Tankersly v. Albright,
374 F. Supp. 538)
Under section 59 of the Corporation Code, supra, a voting trust
agreement may confer upon a trustee not only the stockholder's
voting rights but also other rights pertaining to his shares as long as
the voting trust agreement is not entered "for the purpose of
circumventing the law against monopolies and illegal combinations in
restraint of trade or used for purposes of fraud." (section 59, 5th

paragraph of the Corporation Code) Thus, the traditional concept of a

voting trust agreement primarily intended to single out a stockholder's
right to vote from his other rights as such and made irrevocable for a
limited duration may in practice become a legal device whereby a
transfer of the stockholder's shares is effected subject to the specific
provision of the voting trust agreement.
The execution of a voting trust agreement, therefore, may create a
dichotomy between the equitable or beneficial ownership of the
corporate shares of a stockholders, on the one hand, and the legal
title thereto on the other hand.
The law simply provides that a voting trust agreement is an
agreement in writing whereby one or more stockholders of a
corporation consent to transfer his or their shares to a trustee in order
to vest in the latter voting or other rights pertaining to said shares for
a period not exceeding five years upon the fulfillment of statutory
conditions and such other terms and conditions specified in the
agreement. The five year-period may be extended in cases where the
voting trust is executed pursuant to a loan agreement whereby the
period is made contingent upon full payment of the loan.
In the instant case, the point of controversy arises from the effects of
the creation of the voting trust agreement. The petitioners maintain
that with the execution of the voting trust agreement between them
and the other stockholders of ALFA, as one party, and the DBP, as
the other party, the former assigned and transferred all their shares in
ALFA to DBP, as trustee. They argue that by virtue to of the voting
trust agreement the petitioners can no longer be considered directors
of ALFA. In support of their contention, the petitioners invoke section
23 of the Corporation Code which provides, in part, that:
Every director must own at least one (1) share of the capital stock of
the corporation of which he is a director which share shall stand in his
name on the books of the corporation. Any director who ceases to be
the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be director
. . . (Rollo, p. 270)
The private respondents, on the contrary, insist that the voting trust
agreement between ALFA and the DBP had all the more safeguarded
the petitioners' continuance as officers and directors of ALFA
inasmuch as the general object of voting trust is to insure
permanency of the tenure of the directors of a corporation. They cited
the commentaries by Prof. Aguedo Agbayani on the right and status

of the transferring stockholders, to wit:

The "transferring stockholder", also called the "depositing
stockholder", is equitable owner for the stocks represented by the
voting trust certificates and the stock reversible on termination of the
trust by surrender. It is said that the voting trust agreement does not
destroy the status of the transferring stockholders as such, and thus
render them ineligible as directors. But a more accurate statement
seems to be that for some purposes the depositing stockholder
holding voting trust certificates in lieu of his stock and being the
beneficial owner thereof, remains and is treated as a stockholder. It
seems to be deducible from the case that he may sue as a
stockholder if the suit is in equity or is of an equitable nature, such as,
a technical stockholders' suit in right of the corporation. [Commercial
Laws of the Philippines by Agbayani, Vol. 3 pp. 492-493, citing 5
Fletcher 326, 327] (Rollo, p. 291)
We find the petitioners' position meritorious.
Both under the old and the new Corporation Codes there is no
dispute as to the most immediate effect of a voting trust agreement
on the status of a stockholder who is a party to its execution from
legal titleholder or owner of the shares subject of the voting trust
agreement, he becomes the equitable or beneficial owner. (Salonga,
Philippine Law on Private Corporations, 1958 ed., p. 268; Pineda and
Carlos, The Law on Private Corporations and Corporate Practice,
1969 ed., p. 175; Campos and Lopez-Campos, The Corporation
Code; Comments, Notes & Selected Cases, 1981, ed., p. 386;
Agbayani, Commentaries and Jurisprudence on the Commercial
Laws of the Philippines, Vol. 3, 1988 ed., p. 536). The penultimate
question, therefore, is whether the change in his status deprives the
stockholder of the right to qualify as a director under section 23 of the
present Corporation Code which deletes the phrase "in his own right."
Section 30 of the old Code states that:
Every director must own in his own right at least one share of the
capital stock of the stock corporation of which he is a director, which
stock shall stand in his name on the books of the corporation. A
director who ceases to be the owner of at least one share of the
capital stock of a stock corporation of which is a director shall thereby
cease to be a director . . . (Emphasis supplied)
Under the old Corporation Code, the eligibility of a director, strictly
speaking, cannot be adversely affected by the simple act of such
director being a party to a voting trust agreement inasmuch as he

remains owner (although beneficial or equitable only) of the shares

subject of the voting trust agreement pursuant to which a transfer of
the stockholder's shares in favor of the trustee is required (section 36
of the old Corporation Code). No disqualification arises by virtue of
the phrase "in his own right" provided under the old Corporation
Code.
With the omission of the phrase "in his own right" the election of
trustees and other persons who in fact are not beneficial owners of
the shares registered in their names on the books of the corporation
becomes formally legalized (see Campos and Lopez-Campos, supra,
p. 296) Hence, this is a clear indication that in order to be eligible as a
director, what is material is the legal title to, not beneficial ownership
of, the stock as appearing on the books of the corporation (2 Fletcher,
Cyclopedia of the Law of Private Corporations, section 300, p. 92
[1969] citing People v. Lihme, 269 Ill. 351, 109 N.E. 1051).
The facts of this case show that the petitioners, by virtue of the voting
trust agreement executed in 1981 disposed of all their shares through
assignment and delivery in favor of the DBP, as trustee.
Consequently, the petitioners ceased to own at least one share
standing in their names on the books of ALFA as required under
Section 23 of the new Corporation Code. They also ceased to have
anything to do with the management of the enterprise. The petitioners
ceased to be directors. Hence, the transfer of the petitioners' shares
to the DBP created vacancies in their respective positions as
directors of ALFA. The transfer of shares from the stockholder of
ALFA to the DBP is the essence of the subject voting trust agreement
as evident from the following stipulations:
1. The TRUSTORS hereby assign and deliver to the TRUSTEE the
certificate of the shares of the stocks owned by them respectively and
shall do all things necessary for the transfer of their respective shares
to the TRUSTEE on the books of ALFA.
2. The TRUSTEE shall issue to each of the TRUSTORS a trust
certificate for the number of shares transferred, which shall be
transferrable in the same manner and with the same effect as
certificates of stock subject to the provisions of this agreement;
3. The TRUSTEE shall vote upon the shares of stock at all meetings
of ALFA, annual or special, upon any resolution, matter or business
that may be submitted to any such meeting, and shall possess in that
respect the same powers as owners of the equitable as well as the
legal title to the stock;

4. The TRUSTEE may cause to be transferred to any person one

share of stock for the purpose of qualifying such person as director of
ALFA, and cause a certificate of stock evidencing the share so
transferred to be issued in the name of such person;
xxx xxx xxx
9. Any stockholder not entering into this agreement may transfer his
shares to the same trustees without the need of revising this
agreement, and this agreement shall have the same force and effect
upon that said stockholder. (CA Rollo, pp. 137-138; Emphasis
supplied)
Considering that the voting trust agreement between ALFA and the
DBP transferred legal ownership of the stock covered by the
agreement to the DBP as trustee, the latter became the stockholder
of record with respect to the said shares of stocks. In the absence of
a showing that the DBP had caused to be transferred in their names
one share of stock for the purpose of qualifying as directors of ALFA,
the petitioners can no longer be deemed to have retained their status
as officers of ALFA which was the case before the execution of the
subject voting trust agreement. There appears to be no dispute from
the records that DBP has taken over full control and management of
the firm.
Moreover, in the Certification dated January 24, 1989 issued by the
DBP through one Elsa A. Guevarra, Vice-President of its Special
Accounts Department II, Remedial Management Group, the
petitioners were no longer included in the list of officers of ALFA "as of
April 1982." (CA Rollo, pp. 140-142)
Inasmuch as the private respondents in this case failed to
substantiate their claim that the subject voting trust agreement did not
deprive the petitioners of their position as directors of ALFA, the
public respondent committed a reversible error when it ruled that:
. . . while the individual respondents (petitioners Lee and Lacdao)
may have ceased to be president and vice-president, respectively, of
the corporation at the time of service of summons on them on August
21, 1987, they were at least up to that time, still directors . . .
The aforequoted statement is quite inaccurate in the light of the
express terms of Stipulation No. 4 of the subject voting trust
agreement. Both parties, ALFA and the DBP, were aware at the time
of the execution of the agreement that by virtue of the transfer of
shares of ALFA to the DBP, all the directors of ALFA were stripped of
their positions as such.

There can be no reliance on the inference that the five-year period of

the voting trust agreement in question had lapsed in 1986 so that the
legal title to the stocks covered by the said voting trust agreement
ipso facto reverted to the petitioners as beneficial owners pursuant to
the 6th paragraph of section 59 of the new Corporation Code which
reads:
Unless expressly renewed, all rights granted in a voting trust
agreement shall automatically expire at the end of the agreed period,
and the voting trust certificate as well as the certificates of stock in
the name of the trustee or trustees shall thereby be deemed
cancelled and new certificates of stock shall be reissued in the name
of the transferors.
On the contrary, it is manifestly clear from the terms of the voting trust
agreement between ALFA and the DBP that the duration of the
agreement is contingent upon the fulfillment of certain obligations of
ALFA with the DBP. This is shown by the following portions of the
agreement.
WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its
credit is secured by a first mortgage on the manufacturing plant of
said company;
WHEREAS, ALFA is also indebted to other creditors for various
financial accomodations and because of the burden of these
obligations is encountering very serious difficulties in continuing with
its operations.
WHEREAS, in consideration of additional accommodations from the
TRUSTEE, ALFA had offered and the TRUSTEE has accepted
participation in the management and control of the company and to
assure the aforesaid participation by the TRUSTEE, the TRUSTORS
have agreed to execute a voting trust covering their shareholding in
ALFA in favor of the TRUSTEE;
AND WHEREAS, DBP is willing to accept the trust for the purpose
aforementioned.
NOW, THEREFORE, it is hereby agreed as follows:
xxx xxx xxx
6. This Agreement shall last for a period of Five (5) years, and is
renewable for as long as the obligations of ALFA with DBP, or any
portion thereof, remains outstanding; (CA Rollo, pp. 137-138)
Had the five-year period of the voting trust agreement expired in
1986, the DBP would not have transferred all its rights, titles and
interests in ALFA "effective June 30, 1986" to the national

government through the Asset Privatization Trust (APT) as attested to

in a Certification dated January 24, 1989 of the Vice President of the
DBP's Special Accounts Department II. In the same certification, it is
stated that the DBP, from 1987 until 1989, had handled APT's
account which included ALFA's assets pursuant to a management
agreement by and between the DBP and APT (CA Rollo, p. 142)
Hence, there is evidence on record that at the time of the service of
summons on ALFA through the petitioners on August 21, 1987, the
voting trust agreement in question was not yet terminated so that the
legal title to the stocks of ALFA, then, still belonged to the DBP.
In view of the foregoing, the ultimate issue of whether or not there
was proper service of summons on ALFA through the petitioners is
readily answered in the negative.
Under section 13, Rule 14 of the Revised Rules of Court, it is
provided that:
Sec. 13. Service upon private domestic corporation or partnership.
If the defendant is a corporation organized under the laws of the
Philippines or a partnership duly registered, service may be made on
the president, manager, secretary, cashier, agent or any of its
directors.
It is a basic principle in Corporation Law that a corporation has a
personality separate and distinct from the officers or members who
compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347
[1976]; Osias Academy v. Department of Labor and Employment, et
al., G.R. Nos. 83257-58, December 21, 1990). Thus, the above rule
on service of processes of a corporation enumerates the
representatives of a corporation who can validly receive court
processes on its behalf. Not every stockholder or officer can bind the
corporation considering the existence of a corporate entity separate
from those who compose it.
The rationale of the aforecited rule is that service must be made on a
representative so integrated with the corporation sued as to make it a
priori supposable that he will realize his responsibilities and know
what he should do with any legal papers served on him. (Far
Corporation v. Francisco, 146 SCRA 197 [1986] citing Villa Rey
Transit, Inc. v. Far East Motor Corp. 81 SCRA 303 [1978]).
The petitioners in this case do not fall under any of the enumerated
officers. The service of summons upon ALFA, through the petitioners,
therefore, is not valid. To rule otherwise, as correctly argued by the
petitioners, will contravene the general principle that a corporation

can only be bound by such acts which are within the scope of the
officer's or agent's authority. (see Vicente v. Geraldez, 52 SCRA 210
[1973]).
WHEREFORE, premises considered, the petition is hereby
GRANTED. The appealed decision dated March 19, 1990 and the
Court of Appeals' resolution of May 10, 1990 are SET ASIDE and the
Orders dated April 25, 1989 and October 17, 1989 issued by the
Regional Trial Court of Makati, Branch 58 are REINSTATED.
SO ORDERED.
Feliciano, Bidin, Davide, Jr. and Romero, JJ., concur.